Mondelez International, Inc.

Good day and welcome to the Mondelez International fourth quarter 2021 year-end earnings conference call. Today's call is scheduled to last about one hour, including remarks by the Mondelez management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your touchtone phone at any time during the call. I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Please go ahead, sir.

Good afternoon, and thanks for joining us. With me today are Dirk Vandeput, our Chairman and CEO, and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, Q, and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis, unless otherwise noted. We're also presenting revenue growth on a two-year CAGR basis to provide better comparability given the impact of COVID on 2020 results. You can find the comparable gap measures and gap to non-gap reconciliations within our earnings release and at the back of the slide presentation. In today's call, Dirk will provide a business and strategy update, then Luca will take you through our financial results and outlooks. We will close with Q&A. Before turning it over to Dirk, I would like to remind you of two upcoming investor events. First, we will present virtually on February 22nd at CAGNI, focusing on our EMEA region. And second, please save the date for a Mondelez Investor Day on May 10. With that, I'll turn the call over to Dirk.

Thank you, Shep. And thank you, everyone, for joining the call today. I am starting off at slide four. 2021 marked another year of strong top and bottom line results. Growth was driven equally by volume and pricing as we leveraged the strength of our brands and execution capabilities. We continued to deliver on our long-term growth algorithm, returning nearly $4 billion in capital to shareholders while investing in our growth initiatives, positioning us well to deliver strong performance in 2022 and beyond. The COVID-19 pandemic continues to impact both consumer behavior and the broader operating environment. Against this backdrop, over the past two years, consumers continue to choose our trusted and beloved brands for both comfort and sustenance, at home and on the go. We have delivered on this strong underlying demand across our brands and geographies with continued strength in execution, activation, and innovation. As a result, our cumulative market share remains higher than pre-COVID levels. At the same time, we are continuing to operate in a dynamic environment characterized by global input cost inflation alongside supply chain, labor, and transportation disruption. We are effectively mitigating these challenges through ongoing cost discipline and strategic pricing actions. We also continue to execute well against our strategic growth priorities, investing in our brands, capabilities, and sustainability initiatives while expanding our portfolio with the addition of several growth-accretive acquisitions, You, Grenade, Gourmet Food, and Chipita, which closed earlier this month. These additions increase our exposure to broader snacking categories and growing profit pools. Along with our financial performance, we made progress in other areas. We continue to advance our ESG goals, setting ambitious new targets for achieving net zero by 2050, and we continue to accelerate our DEI agenda. And none of this would be possible without our people, the best in the CPG industry. We're proud of the way our teams continue to focus on delivering great products to our consumers, as pandemic conditions continue to impact both our work lives and our personal lives. I am especially grateful to our frontline teams whose hard work and dedication delights families all over the world. We are confident that the strength of our brands, our proven strategy, and our continued investments position us well to achieve our long-term financial targets in 2022 and beyond. Let's take a closer look at the market and macro trends on slide five. With the recent rise of the Omicron variant, the rebound in mobility that we saw earlier in 2021 has slowed down in both developed and emerging markets and is expected to remain 10 to 15% below pre-COVID levels in many markets. Time at home and eating at home look likely to remain elevated. In the US, for example, 60% of adults are not expecting to eat out more in 2022 than they did in 2021. These positions are core biscuits and chocolate portfolios well, as they are skewed towards in-home consumption. The pandemic continues to fuel the desire for comfort and indulgence. benefiting our categories and trusted brands. And overall, as we found in our state of snacking survey released last week, the tendency for daily snacking is up for a third consecutive year. And although 70% of global consumers report concerns about inflation, it has done little to date to change their grocery shopping behavior. This is consistent with the observed price elasticity, which has been much lower than historical levels, as well as a continued share weakness for private label. Let me spend a moment on the current operating environment on slide six. Like other companies, we are experiencing cost inflation globally, particularly on transportation costs, dairy, edible oils, and packaging. We have implemented material price increases, ensured we are significantly hedged across key commodities, and we are continuing to drive productivity measures. We also continue to manage through significant volatility in the supply chain due to labor shortages at third parties, as well as a continuing gap between demand and supply of trucking capacity and containers in places like the US and the UK. In addition, The US strike in Q3, although resolved, impacted our production output and inventory levels in the quarter. Additionally, COVID-19 continues to cause disruption in consumer mobility in certain geographies, impacting our gum business and on-the-go products. This currently affects a small portion of emerging markets. Additionally, the rise of the Omicron variant is driving high levels of absenteeism in certain markets while limiting recovery mobility. We are focused on reactivating part of our COVID playbook from the early pandemic days and also looking to further simplify our operations to offset this pressure. And although challenging, we are managing effectively through each of these dynamics. We implement our revenue growth management levers and continue to invest in our brands while taking extensive measures to lighten the supply chain disruption. By applying the lessons learned from earlier waves of the pandemic and maintaining our focus on execution, we are confident that we remain well positioned to deliver our growth targets. Turning to slide seven, you can see that our strategy is continuing to drive a virtuous cycle. strong volume momentum, combined with brand investments and strategic pricing options, composition as well to consistently deliver profitable top and bottom line growth, as well as strong return of capital to our shareholders. We grew revenue by 5.2% in 2021, lapping 3.7% growth in 2020. Volume was once again a big contributor to this growth, which demonstrates the fundamental strength and health of our business. Despite the ongoing impact of cost inflation and supply chain volatility, we delivered gross profit growth of 3.6%. Our working media investments have increased double-digit versus last year, on the back of a double-digit increase in 2020. Combined with our advantage portfolio of brands and our execution activation capabilities, We gained or held shares across 75% of our revenue on a two-year cumulative basis. We increased operating income by 5.8% and delivered 3.2 billion in free cash flow. We view these results as a healthy indicator of our ability to continue to deliver on our long-term growth algorithm. As you can see on slide eight, We are now averaging a 4.2% quarterly growth rate since the launch of our strategy in September 2018. We are proud of our strong and consistent track record over this time. By continuing to focus on profit dollar growth, local first commercial execution, high return investments, and aligned incentives, we are confident that we can continue to consistently deliver attractive growth. On slide 9, you can see some highlights of our successful execution against our long-term growth drivers. These include delivering our strongest Christmas sales on record in Europe, growing double-digit versus 2020 and 2019, led by Cadbury in the UK and Milka in Germany. It also includes continuing to expand distribution in emerging markets, adding 300,000 stores in China and more than 200,000 stores in India. It includes investing to sustain growth in digital commerce, which grew 29% on a reported basis, lapping 75% growth in 2020. Digital commerce now accounts for approximately 6% of revenue, up from 3% in 2019. And it also includes expanding our presence in high-growth segments where we are underrepresented, including well-being, where we launched breakthrough innovations on key brands like Oreo Zero Sugar in China, as well as Cadbury Plant Bar and Plant-Based Philadelphia in the UK. As consumer demand for well-being options rises, each of these innovations has the clear potential to expand to additional geographies. We also grew our presence in the premium biscuit space with double digit growth led by dates, which we successfully transitioned to direct store delivery. Additionally, we expanded our presence in close in adjacencies, such as baked snacks with the successful integration of give and go. By realizing revenue and cost synergies, we grew that business double digit in 2021. We also expanded our presence in snack bars with the acquisition of Grenade in the UK. Switching to slide 10, we continue to further enhance and strengthen our portfolio in 2021, expanding our exposure to the growing profit pools in chocolate and biscuits, as well as adjacent categories and the well-being and premium segments. We acquired four high-growth strategic assets, Chipita Baked Snacks in Europe, which just closed in January, Grenade Wellbeing Snack Bars in the UK, Gourmet Food Premium Crackers in Australia, and You Premium Wellbeing Snacks in the US. These acquisitions are worth $800 million in annual revenue, and they are well positioned to collectively deliver high single-digit growth for years to come. This takes our total number of acquisitions to seven since 2018, and contributing over 1.5 billion of revenue. We also earned 1.5 billion in net proceeds from selling down on our beverage assets in 2021, enabling further investment in our brands and growth drivers. Additionally, we are in the process of completing a strategic review of our developed market gum business. We expect to complete that review and have more information to share with you at our May 10 investor day. 2021 was a strong year, and we are well positioned for another year of strong shareholder returns in 2022 and beyond. By staying close to our consumers, executing our proven strategy, and taking the appropriate actions to navigate input cost inflation and supply chain volatility, I am confident that we can deliver strong performance for years to come. With that, I will hand over to Luca for more details on our financials.

Thank you, Dirk, and good afternoon. Our full year and full quarter performance was strong in terms of revenue growth, volume, earnings, and free cash flow. We delivered revenue growth for the year and quarter of 5.2% and 5.4% respectively. Importantly, half of this performance was underpinned by volume. Emerging markets increased 12% for the year and 11% for the quarter, with strong performance across significant majority of countries, especially the BRICS. Despite a small group of countries, specifically in Southeast Asia, continuing to face COVID-related challenges, overall we are encouraged about the outlook for our EMs in the near and long term. Developed markets grew 1.6% for the year, coming off an exception of 2020, and 2.5% for the quarter, off a strong comparison. As with our emerging markets, we are encouraged by the sustained performance, particularly in our key course next categories. On slide 13, you can see our portfolio performance. Chocolate and biscuits remain attractive and durable categories with very strong results, both pre-pandemic, during the pandemic, and importantly, as we enter 2022. In addition, improved mobility has yielded growth in gum and candy versus 2020, approaching a return to pre-pandemic levels in many markets, and back to growth versus 2019 in China. Biscuits grew 3% for the year and 3.2% for the quarter. EMs were the big driver of performance, with majority of our EMEA and LLA business delivering double-digit or high single-digit growth. This underscores the large, long-term opportunity for our EM biscuit businesses, as we continue to make investments in ANC portfolio growth and distribution expansion. Both global and local jewelry brands, including Oreo, Chips Ahoy, Barney, and Club Social, deliver strong growth. Chocolate grew more than 10% for the year and 8% for the quarter, with significant growth across both developed and emerging markets through both our global and local brands. Chocolate is a great category to be in, and as in biscuits, we continue to make investments in our brands and capabilities to continue to drive its performance for the years to come. Gum and candy posted 7% growth for the year and more than 11% growth for the quarter, as increased mobility resulted in a return to growth in several key markets, especially within Latin America. Now let's review our market share performance on slide 14. We continue to see good share performance on a two-year cumulative basis as we prioritize ANC investments and execute well in most markets. We held or gained share in approximately 75% of our revenue base on a two-year stock. Our biscuits and chocolate categories continue to do well with 80% of our revenue base holding or gaining share. Overall, share gains versus 2019 were broad-based, with all regions growing share over a two-year period. A few of the more notable areas of share gains over this time include China, Russia, India, Brazil, and Mexico biscuit, UK, Russia, and Australian chocolate, and China gum. As we move into Q1, we expect softer share performance, driven by our North American segment. as the combination of supply chain constraints from third parties and labor shortages will pressure stocks and service levels. While the immediate effect of the strike is behind us, we have entered 2022 with low stocks, and we are working to rebuild inventory levels, which takes time in this environment, particularly as demand continues to be strong. We expect a gradual improvement of the situation as the year progresses. Now turning to page 15. For the year, we deliver strong oil dollar growth of almost 6%, driven by solid gross profit dollar increases and reduced overheads. For the quarter, profitability was pressured, primarily due to the lag between commodities and forex-related inflation and implementation of pricing actions, specifically in North America, where price increases became effective at the beginning of January. Turning to regional performance on slide 16, Europe grew 5% for the year and 6.5% for the quarter, supported by strong execution and activation, and continued recovery in the convenience away from home and travel retail channels. Our Q4 results were driven by strong growth across major markets, including the UK, Germany, and Russia, underpinned by solid share gains. In chocolate, we delivered record results for the Christmas season, growing double-digit against both 2020 and 2019. Biscuits and milks categories also delivered good results. White-dollar growth for the year was high single-digit, driven by continued volume leverage, cost control, and strong overhead management. Looking ahead in this region, we expect muted profitability in Q1, with improvement beginning in the second quarter, as price increases in a number of countries take effect. North America declined by 0.6% for the year and 0.3% for Q4, lapping very strong high single-digit growth in the previous year. This performance includes healthy growth from our ventures portfolio. Softening the quarter and second half were also driven by supply chain constraints and low inventory levels due to the strike and third-party labor constraints. North America OI declined minus 10.4% for the year and minus 20% for the quarter due to inflationary pressure and supply chain constraints. As mentioned earlier, we expect sequential improvement as pricing actions go into effect in Q1. AMIA grew 7.3% for the year and 5.8% for the quarter, showing continued strength across most of the region. India grew double digits for the year and continues to execute well and reinvest for the future. We continue to extend our leadership position in chocolate, while the growth of our biscuit business continues to outpace larger competitors in the region. China grew low double-digit for the year and high single-digit for the quarter, driven by continued share gains in both biscuits and gum. Australia and New Zealand also did well, with solid performances in the year and in the quarter in chocolate and biscuits. AMIA increased OI dollars by more than 13% for the year due to strong volume leverage, productivity, and overhead management, while also increasing working media by double digits. Q4 growth was more muted due to commodity inflation. As in other regions, pricing actions through RGM are being implemented as of Q1. Latin America turned in strong growth for the year of 20.4% and 19.7% for the quarter, with overall share gains for 2021. Brazil delivered strong double-digit growth for the year and quarter. Mexico grew high single digits for both the year and the quarter, and now Western Indian business grew high single digits for the year and mid-teens for the quarter. Adjusted ROI dollars in Latin America increased high double digits for the year and more than 40% for the quarter. These increases were driven by growth-based growth across core snacking categories, effective pricing, and the volume and mix impact of higher gum and candy. Inflationary pressure remains challenging, but we believe both RGM and volume growth will enable us to largely offset this dynamic in 2022. Moving to EPS. Full year EPS grew 9% at constant currency. This growth was primarily driven by top line driven operating gains. Turning to free cash flow and capital return on slide 18. We deliver full year free cash flow of 3.2 billion, which included 300 million higher tax payments year over year. Some related to our coffee, JVs, IPOs, and sell downs. We continue to feel confident about our free cash flow trajectory as we move forward. And for the year, we returned 3.9 billion to shareholders in the form of dividends and shared purchases. Now, let me provide some color on our 2022 outlook on slide 20. We expect to deliver against our long-term growth algorithm that we see as a performance floor, particularly as revenue goes. As you are hearing across all sectors, we anticipate another year of material cost inflation, which in percentage terms is expected to increase high single digits versus 2021. As such, pricing will be a larger top-line contributor than in the previous years, but we do expect volume growth to also be a positive factor. In this regard, a few more points. Our superior portfolio of brands and the consistent investments we have made and will continue to make in working media, marketing and sales, out-to-market and RGM capabilities position us well for sustained growth and profitability in this higher inflation environment. We believe we can continue being an effective driver of category value and volume growth, specifically in biscuits and chocolate. Our focus is now changing as we aim at growing profit dollars and dollar growth underpins our sustainable algorithm, cash flow and capital return. We have a history of cost excellence, which we expect to remain the case for 2022 and going forward. Our algorithm continues to be predicated on brand building and capabilities in sales and marketing, also in 2022. All included, for the year, we expect mid-single digital high dollar growth and high single-digit EPS growth. Earnings phasing will reflect the current inflationary environment and the sequential introduction of pricing. We expect improved year-over-year gross profit dollar growth as pricing is fully realized and as we implement additional RGM strategies. But we do still expect some pressure in Q1 and partially in Q2. 41 specifically will still expect to face larger supply chain headwinds in North America related to third-party partners and low inventory from last year's strike that should improve as the year progresses. With respect to free cash flow, we expect another year of $3 billion plus. In this outlook, we also expect an ETR in the low to mid-20s based on what we know today. interest expense of approximately $325 million, and share repurchases of approximately $2 billion.

With that, let's open the line for questions.

Thank you. And at this time, if you'd like to ask a question, please press the star and 1 keys on your telephone keypad. Keep in mind you may remove yourself from the question queue at any time by pressing the pound key. And we will take our first question from Ken Goldman with JP Morgan. Please go ahead. Your line is open.

Hi. Thanks, everybody. Good afternoon. There's been some discussion lately in the media about emerging markets potentially, you know, slowing down a bit as 2022 progresses. I think no one really knows for sure what will happen. But I'm just curious. Seems like things are fine for you now. But as you look ahead to your major regions, your major countries, Is there anything that you are particularly worried about, anything that you look at and say, oh, this could get a little worse as we go? Or is it just sort of, hey, we're planning on steady as she goes, and I'm just curious what's baked into your guidance potentially for a little bit of, you know, not demand destruction, but a little bit of a worse sort of consumer around the world perhaps?

Yep. Well, thanks, Ken. First of all, I would say that around the world, but also in emerging markets today and for the last two years, our core categories have been doing quite well. Chocolate and biscuits have been growing very strongly and, in fact, better than they were before the pandemic. There's a number of factors at work with the consumer. that are boosting the consumption and higher snacking. So we see very robust demand. If I go to our key emerging markets, the BRIC countries, we see that in those four countries also very, very clearly. As it relates to investments and support for our brands, We are also continuing to do that in emerging markets. If anything, that's where we increase the most. And I think that from a pricing perspective, we have been dealing with pricing in emerging markets over the years, and we know that we have to hit certain price points, and we're very careful with that. Having said that, we have already started to increased prices. In fact, the effects that you see in Q4, any price effects there are largely coming from our emerging markets. We've increased prices in most emerging markets around the world. And as you can see, results have been very good. So we also have that very low elasticity that we are also seeing in the rest of the world. So everything is sort of aiming in the right direction we we feel that at this stage there is no signs that it's slowing down in emerging markets obviously in our projections of of our algorithm we have not taken the same height of performance that we've seen this year in our emerging markets we've we've taken that a little bit more conservatively so Based on those two, seeing what we're seeing and the experience that we have, and I believe us doing all the right things as it relates to pricing, investments, gaining distribution, which is another big driver in emerging markets for us, and the fact that we feel that we have been relatively realistic in what we forecast for emerging markets, we feel really good. We think that emerging markets will deliver for us in 2022.

Great. Thank you for that. That's clear. And then a quick follow-up, if I can. Luca, you touched on this a bit, but is it reasonable, just given your comments about the phasing of pricing and maybe the timing of inflation, to think about the flow of your years, maybe being a little bit more back-half loaded and perhaps a little bit more challenged in the front-half And if that's true, are there any specific timing issues we should consider other than pricing and inflation, just as we model ahead?

Thank you, Ken. It is mostly pricing and inflation phasing that will drive the gross profit specifically as a line in the P&L progression throughout the year. Obviously, you saw the number being pressured in Q4, but as you look closely on the segment profitability data that we disclosed, you see that the Q4 GP pressure came mostly from North America, which is where we have just announced pricing. And so you will see a sequential progression that is positive in the gross profit line as of Q1. But the most of the benefit to hit our guidance is going to come in the second part of the year. And as I said, there are two elements there. One is pricing implementation, and there might be multiple pricing waves. The second one is the fact that particularly in Europe, pricing will come into effect as of Q2 and in other places as well. And third, it is the fact that inflation, given the favorable commodity pipeline that we had in 2021 in Q1, is commodity pressure is most acute in the first half of the year. But you will see a better trend in GP dollar as of Q1, and sequentially it will improve over the quarters.

Great. Thank you so much.

Thank you, Kent.

We'll take our next question from Brian Spillane with Bank of America. Please go ahead. Your line is open.

Thanks, operator. Good afternoon, everyone. Hi, Brian. Hi, Brian. Hey, so, Luca, just a couple of maybe just following up on Ken's questioning, just a couple of sort of bridging from 21 to 22 questions, if you will. If we look first, have we quantified or can you quantify just how much the acquisitions contribute to earnings growth in 22 versus 21, adjusted EPS growth?

Look, the chip acquisition is a material acquisition, obviously, in terms of size, but also the number of countries it spans across. And it will be fully integrated, but it will take a little bit of time. I will say that without giving you specific numbers that there is a moderate positive impact on EPS next year, but you will see the full benefit of the revenue and cost synergies as of Q4 and potentially and obviously in 2023. So it will be a modest contribution, all in all considered.

Okay. And just more of a contribution in 23 versus 22?

Absolutely. I think you're going to see the full benefit, and I think it will be pleased in 2023.

Okay. And then if we look at below the operating profit line, in 2021, in the bridge that you laid out in slide 17, including share repurchases, the below the operating profit line items contributed about $0.09 of earnings in 2021. And I guess just looking at the guidance, it just seems like interest expense, the tax rate could both be a bit of a headwind. So can you just sort of give us, should we expect that there would be some earnings contribution below the operating profit line? And if so, I guess would it be mainly share repurchases? Just trying to square how much benefit we get below the operating profit line.

Interest costs will be up around about $20-25 million, so it is one cent of EPS headwind. Tax rates will be a little bit higher, but not much, and so I would say it's like headwind. Obviously, I can't comment very much on the joint ventures as those are publicly traded vehicle, but the biggest benefit is going to be most likely around sharing purchases. In terms of the JVs, I would refer back to what Ozan said about KDP profit guidance for 2022, and I think that's the stance we have taken for that.

Okay. Thanks, Luca. I'll pass it on.

Thank you, Brian.

We'll take our next question from Andrew Lazar with Barclays. Please go ahead. Your line is open.

Great. Thanks.

Good evening, everybody.

Hi, Andrew. Hi, Andrew. Perhaps, Luca, could you just comment first on what your outlook or expectation would be in terms of gross margin change year over year for the full year? And I guess to the extent you see some full-year gross margin compression, you know, more would need then to come from SG&A leverage to get to your sort of mid-single-digit constant currency EBIT target. So in that case, what would be those, you know, SG&A drivers that you would have to lean more heavily on this year potentially, given what your answer on the gross margin is?

Sure. I think you know that we try to move away from gross margin percentages, and I think that has served us well. So talking about gross profit dollars, 2022 is no exception to what we have set consistently throughout the years. We aim at getting at 4 plus percent on that specific line of the P&L. And as I said, I think you're going to see year over year, GP dollar growth as of Q1, but will be most pronounced in the second part of the year. I think, again, as you dissect the numbers, you clearly see that the pressure in Q4 on the GP line, which was likely positive, comes mostly from North America. And what you have to believe for the GP line to improve as the biggest change that has to happen, it is pricing going into effect in North America. The first indication is that a price was accepted by the retailers and b we see our prices going up in the marketplace. So I feel cautiously positive about that, which is clearly the biggest driver of GP progression over the quarters. In terms of SG&A, we will continue investing in advertising. Obviously, we will be very sensible because there are situations, specifically in North America, where we don't have enough stock. And so we are calibrating exactly where we want to spend. But as Dirk said, in emerging markets, we will continue pushing. and we will continue pushing in the other regions too. The point here is the last thing we want to do as we implement pricing is cutting back on ANC investment. As far as overheads and productivities, we will continue the great job that we have done over the last few years, and particularly in the last couple of years, excluding the acquisitions, our over the line pure cost SG&A is down both in 2020 and in 2021. And my goal is to keep that line down year over year. Productivity is obviously going to be good for the year as we look at it, but I'll be commenting more as we publish Q1 about all these specific lines.

And then Mondelez is guiding to positive volume growth for the full year, you know, despite some supply chain challenges and limited shipments in Q1, maybe in the U.S. and Europe, and obviously the higher pricing. So I guess what sort of elasticity relationship is Mondelez underwriting for the year?

Look, we have been a little bit conservative on elasticity. As Dirk said, elasticity is low at this point in time based on what we see across the board. But we are planning for historical levels. So that's the type of elasticity we have planned. And I think you know the number in general. It is one-time elasticity, give or take. But I expect to do better than that.

Thank you.

Thank you, Brian. Thank you.

We'll take our next question from Robert Moscow with Credit Suisse. Please go ahead. Your line is open.

Hi, thanks. I guess one of the surprises in the results is that North America shipments were weak, and all of us look at Nielsen retail data, and it looks really, really strong. So what's happening at retail? Is that just a strong consumer takeaway and the inventories are getting depleted? Should we expect that retail consumption to then weaken in the first quarter as a result of running out of inventory? Maybe help us bridge why it looks so good from a consumption data. And then I had a quick follow-up.

Yes. The demand remains very robust, but the growth that you see is, or far growth that you see is impacted by supply chain constraints and phasing of some of the price actions. And so in between those is our inventory, of course. And if you look at North America, we grew or we were flat for the year, let's say it. But for a two-year category at 4%, which is still quite strong. If you look at the last quarters, we had the strike in Q3, which left us with low inventory levels. And although improving, we it's going slower than you would normally expect because of all the supply chain disruptions that everybody's experiencing. And so we think that we will still continue to see on-shelf effects from the strike throughout Q1. We also work more with external manufacturing than our colleagues, and those external manufacturers are facing labor challenges. And we expect also that we will continue to see some pressures in that area, at least for Q1. And then the biggest difference probably is that price increases, we announced price increases for January 1, so they were not yet reflected in Q4, but you will start to see that as we report Q1. And we continue to work on our broader RGM capabilities. So as you look at Nielsen, you start to see at the moment the effect of those price increases. That's why our Nielsen starts to look better. But if you look at the Nielsen that we saw for last year, that's where you could see the effect of our supply issues. So as we look at Q1, we expect the top line in North America to improve. The margins will also improve, but it's going to be sequentially. As I said, pricing has been executed across U.S., Canada, and our ventures. We are continuing to simplify our portfolio, and we are also taking actions to increase capacity, work more temporary labor, and so on, so that we sort of ease the pressure on our supply chain. We are continuing to invest in our brands. As Luca said, we will be careful to invest in those brands where we have good supply. But with the price increases, we are determined that we will have to continue to support our brands. And as you will see as these effects or these initiatives take effect in 22, the top and the bottom line growth will start to come back for North America. That may be a last remark. The bottom line will be sequential because if you look at it year over year, Q1 was a very good year last year, so you will still see some year over year pressure. And we have that lower inventory issue that I was referring to. But overall, you will see a very good improvement over the coming quarters.

Okay. My follow-up. You've been providing us with market share trends on a two-year basis, but are you going to continue that in 2022? Because I think people will start to judge you more on a year-over-year basis. How will you represent your market share trends?

We are going to go back to year-over-year. We thought it was useful with the pandemic because there was a number of effects last year and also this year, exceptional effects that influenced market share. And so we thought it was better to keep on comparing market share compared to pre-pandemic. Now that the pandemic is not behind us but improving, we feel that we can go back to normal market share. For instance, if you look at 2021, you have the U.S. strike in there, which affects, of course, our market share. But I think it's important to look at how the U.S. has been performing versus what it was before the pandemic and then excluding the strike. In Canada this year, we were out of a listing with one of the most important customers there for quite a while, which also, of course, affected our market share. But we are back into that client, so the market share is going to come back. And then we had also exceptional effects in the UK chocolate. Last year, where one of our competitors had a major supply chain effect, which then benefited us. This year, the supplier chain is back up and running, so as a consequence, we give back some of that market share. And then we had one of our plants in France, which was affected last year, and we were not able to supply the market, so that had an effect for us too. So there's all these, and last year, I'm not going into the details about our competitors, but last year we had big wins because our supply chain performed better than our competitors, I would say. So the main thing for us was to show the accumulated over the two years and then and over the two years we still we see a very solid increase versus what it was before the pandemic and going forward we will start to compare year over year again unless there is exceptional effects which we can then inform you about okay thank you we'll take our next question from chris grow with stifle please go ahead your line is open

Thank you. Good evening. Hi, Casey. Hi. Hi. I just had a question for you first on – I had a question for Luke in relation to your hedging. There was a come of the year about 70% hedge for the year. I did want to get a sense of that would be considered normal or above or below where you normally would be at this time of year. And then just understand, because you were quite hedged in 2021 as well, the degree to which some of these unhedged costs – freight or packaging or things that you can't have, are those like a lingering risk to 2022 or do you have a good, you know, a better read on those costs for the coming year?

Thank you for the question. It's a very good one. 70% is pretty much in line with what we had in last year. It is higher than what it has been historically and over time what we have done is we have moved the needle up in terms of going longer because obviously that gives us the opportunity at the low levels to buy more and so you have the opportunity to sit back and wait until the situation evolves And mostly of these hedges are two options and they are not straightforward coverage. So we still have flexibility should one of these commodities go over. And I think that's a great advantage. So I don't feel particularly worried about the remaining 30% at this point, but there are parts where there might still be pressure. What we see these days is a little bit more pressure coming out of daily, and potentially we will have to consider additional pricing for that in some places where we sell daily-based products. And we also see some pressure in packaging and some ingredients. Now, the assumption we have at this point in time for the second part of the year is inflation for those that is in line to what we have seen and what we are seeing these days. There could be potentially more. I don't expect a material number at this point in time. But, you know, we got a little bit surprised on these unhedgeable commodities and exposures in the second part of last year. So we are very vigilant, and if in case they go up, we will have to price, and we will do so.

Okay. Thank you for that color and that information. I had just one other question in relation to what have been some really strong market share trends, and that's the culmination of a lot of work in marketing and new products and in your categories doing so well also. I guess I'm just curious as you think about your – you know, pricing strategy for the coming year is but one, you know, example. Just to the degree to which you think there's maybe a little risk to your market shares, are you seeing, are you taking pricing that largely reflects what your competitors are doing and inflation in that market, and therefore there shouldn't be a whole lot of movement in share? Just trying to get a sense, given how strong it's been, if that can be a bit of a watch point.

Yeah, well, our pricing is... Largely driven by what we think is acceptable to the consumer. We don't know what our competitors are planning until they do it. And so we try to price in line with what we think our consumers are prepared to pay for our brands. And that is different between emerging markets and developed markets. So in developed markets where you're largely talking about supermarkets and there's a whole bunch of pricing effects, you have a little bit more liberty. In emerging markets, we need to hit certain price points. So we do a lot of work on RGM. price per architecture and so on. So we expect that we will be very sensible. We're working very hard on RGM and better understanding what is possible for pricing for our brands, what is acceptable to the consumer. As you know, many years ago, we've had a few episodes where we probably went a little bit overboard on pricing. So we will step a little bit more carefully as it relates to pricing. So far, as I was explaining in Q4, we've been pricing in emerging markets, and so far that is working really well for us. And so it seems to be that our methodology is working. We'll see what happens in the U.S. and in Europe, but at this stage it feels pretty solid, and we don't expect that there will be any major issues. Going forward, second half and into 23, we will see what the inflationary pressure is going to be. But I can assure you that we will step very carefully and make sure that we continue to see volume growth for our brands.

Okay.

Thank you for that.

Okay. We'll take our next question from David Palmer with Evercore ISI. Please go ahead. Your line is open.

Great. Thanks. Good evening. Question on pricing. We can see some clear pricing that you're taking in developed markets here into 22 with the positive volume guidance. I don't want to get too carried away about the incremental pricing. Are you thinking that there might be some moderation in pricing from emerging markets in 22 versus 21, or should that be very similar?

Very similar is the straight answer, David. There are pockets where we don't see the level of inflation that we have for the totality of the company. But in general terms, particularly around Forex, there are places where there is a little bit more inflation. And so given all the puts and takes pricing-wise, you're going to see a level of pricing in emerging markets that is in the same ballpark of 2021, a little bit higher. As a reminder, we implemented, I believe, two price waves in places like Russia in 2021. We implemented, I believe, three price waves in Brazil. And I can go on and on and talk about Mexico, Southeast Asia, man up in South Africa, where we have implemented multiple rounds in 2021 as well.

Great. Thank you. And just thinking about your contribution to growth in 2022 versus 2021, You mentioned how in the last couple of years, perhaps you've gotten some points of distribution gains, particularly in developed markets, from smaller brands that may not have had access or might have had more issues with supply chain, even though you gave some of that back in 21. I wonder if that's going to be, you suspect you'll have some tougher comparisons in developed markets against smaller brands this year. But then I think about the ability for you to have new product news this year, and then the acquired businesses that you've had, they could possibly get into greater distribution. So I'm trying to think about how you're thinking about the puts and takes of what seems to be some headwinds and some tailwinds going into this year. Thanks.

Yes. So I would say, first of all, on the smaller brands, that effect – is certainly continuing in Q4, and they continue to do well to the extent that if we have some supply issues, it is sometimes in those smaller brands because they keep on selling at the higher levels we had during the pandemic, and that sometimes gives us some capacity pressure. So we are trying to do whatever we can to deal with those capacity issues, of course, but we are at the moment assuming that gradually they will give back a little bit, but we do still think that those brands will keep some of that momentum that we're seeing, that we started to see during the pandemic. And you are right, our global brands have performed really well this year. This was a year where our big, our global brands, grew, outgrew our local brands. Last year, in 20, it was the local brands who outgrew the global brands. The reason is because Aurea, Milka and Cadbury, our top three brands, continued to be high single digit to double digit. And then you have the recovery of a brand like Toblerone, which is largely sold in world travel retail. or Trident, the gum, which is, of course, sold on the go, and they were heavily disrupted in 2020. The local brands, as I was saying, still are doing quite well. They are in the mid-single-digit growth range, and we don't necessarily see that slowing down going into next year. So and then there is the additional effect from the acquisitions. Of course, Chipita, you will not see that in our top line until the acquisition is done for 12 months. So you won't see an effect from that one. But you will see a good year for give and go this coming year. We are expecting and also a brand like Perfect Snacks, which is a snack bar, which is also largely consumed on the go. that was affected by the pandemic, we're also expecting that to see a good growth. States, we have moved on to DSD, so very solid, very strong, high double-digit growth there this year, which we think will continue into next year. So, yes, there is that additional effect. Also important to mention is that the price increase has covered all the brands in the U.S., the global brands, the local brands, and the venture brands.

Thank you.

Thank you, David. We'll take our next question from Jason English with Goldman Sachs. Please go ahead. Your line is open.

Hey, folks. Thanks for slotting in. I appreciate it. Hi, David. A couple of questions. Hey, there. It looks, from everything we see, like inflation, particularly onerous in the U.S., is maybe kind of close to peaking. But it sounds like it's still building in markets like Europe and elsewhere. Can you walk us around the world real quick and tell us what you're seeing in terms of cadence, level, pace, magnitude of inflation?

Yeah, sure. I'll take a stab at it. I would start by saying that the inflation is really the highest in the U.S., And look, it might be at the highest point in the US right now. I don't necessarily see it going down in the second part of the year. So I want to make that point first. In terms of inflation, look, majority of the commodities we procure, they are global commodities. And so the inflation rate pressure is pretty much the same around the world. Logistics costs is on the rise everywhere around the world, not to the level that we see in the US. And then there are packaging related costs and ingredients that are pretty much consistent across the world. In terms of inflation, where it is mostly acute these days, it is in places where we have seen currencies weakening versus the dollars. It is in places like Russia. It is in places like Brazil. But overall, if you look around the world in terms of inflationary pressure, I would say there are, yes, somewhere some peaks, but overall it is fairly even, I would say. There are certain commodities that are more impacted than others. Cocoa, for instance, is a little bit more benign in 2022 than it has been in 2021. And so places where we have a material chocolate business like Europe are going to see in terms of inflation a little bit less. But I just mentioned in one of the previous questions and there might be further pressures coming up. So hopefully I gave you a little bit of color on how we see costs evolving by region and by countries a bit.

Yeah, I know that's super helpful. And just to come back to North America, obviously it's unfortunate, the persistent problems you're seeing in North America. I guess my question is, they seem to be surprising you. If we look at the Nielsen data, kind of back to more on Moscow's question, demand's there, and it looks like you're actually inducing demand because the promotional levels remain elevated. They're growing year on year. So it looks like you've got a sales force on one side of your organization pushing demand, and you've got a supply chain on the other side saying, wait, we can't fill demand. And there seems to be this disconnect between the two organizations. So two questions. One, is it fair? And two, What's wrong to cause that disconnect, if so?

I would say that for sure in the beginning of the inflation or the supply chain disruption, which we started to see in August, September of 21, there was clearly a disconnect because our sales team saw high demand and the supply chain suddenly started to realize that transportation was difficult and that there was a number of other issues that were going on, a little bit of capacity and so on, labor shortages in our third parties. And so, yeah, it took us probably a few months before we realized we need to reset here. Since then, the teams have been working quite closely trying to link up whatever demand generation that we have with the supply capacity that we have. And so I'm expecting that in the coming months we see that starting to work a lot better for us. So I would say it's fair, but we've gotten under that now and we've solved the problem. And so going forward we should be okay.

Got it. Okay.

Not sure if there was a second part to the question. That was it, I believe, no?

Well, yeah, no, that's good. We can cover it up. We're connecting again later, so I'll follow up later, too. Thanks.

Okay.

And we'll take our next question from Rob Dickerson with Jefferies. Please go ahead. Your line is open.

Great. Thanks so much. I just have one question just with respect to the top line, kind of circling back to all the commentary so far through Q&A. I know previously it sounds like you were looking for, let's call it, maybe 6% to 7% pricing this year that's implemented early part of January in North America. And then to David Palmer's question, It sounds like, you know, pricing in most EMs would kind of remain at a similar level relative to 2021, while at the same time there should be some improved pricing, sounds like, coming through in Europe. So if I square all that, you know, is it fair to say that, you know, maybe pricing for the year would, it sounds like it's at least 3%, you know, maybe it could be a little bit higher because I'm obviously just trying to, get to some gauge as to what's a rational kind of organic, you know, growth forecast for the year, just, you know, kind of outside of just, you know, your traditional 3% plus kind of long-term guidance. That's all. Thanks.

Thank you for the question. We are usually not giving the breakdown pricing and volume, and we try to move away to keep some sort of flexibility. But what I will tell you is that, as I said in the prepared remarks, I see the 3% plus as a plus in it, as a floor. And at this point in time, we really want to see how Q1 plays out. uh with some prices increases and and omicron before we commit to a higher number but hopefully you know we see q1 coming in uh in line with our internal expectations and now we will be in a position to uh raise the guidance on top line potentially uh after we see q1 and we have q1 under the belt um hopefully that's that's uh answering some of your questions yeah

Fair enough. I guess I'll try another one. Just in terms of cash balance, you know, you're kind of ending 21 with a decent amount of cash. Leverage looks to be now, you know, a bit sub three times. And it sounds like, you know, gum business is still, you know, under strategic review. So, you know, kind of outside of the two billion potential and share repo, How are you thinking about just kind of general cap allocation in terms of M&A? Like, do you feel as if as you get through 21, it's about, you know, stabilizing and tucking in JAPITA and working on distribution opportunities with, you know, acquisitions already done? Or, you know, are you still pushing forward in terms of health bonus, premium, et cetera? That's all. Thanks.

Look, the cash position at the end and the net debt position at the end of 2021 is obviously fairly good because we have done quite a bit of work all around. And I'm very happy with leverage being at 2.7 times. Having said that, in January, we have just cut a $2 billion check almost for Chipita. So bear that in mind. In terms of capital structure, we will continue generating cash flow. And I was very happy with the quality of the cash that came in into 2021. So I feel the first element, which is foundational of our capital structure is there. And then clearly at this point in time, If we had an acquisition that is similar to Give and Go or Chipita, et cetera, we would still be able to fund it. Through that, we obviously have our coffee stakes, and we have all it takes, including potentially switching off share buybacks to be able to face an acquisition of the level that Give and Go and Chipita have been. All right. Fair enough. Thanks, Luca. Thank you.

And in the interest of time, I will now turn the program back to Derek van de Putt for any closing remarks.

Thank you. Well, in closing, we feel good about our 2021 performance across our key metrics, of course, including the top-line growth. We see good volume, profitability was good, and the cash generation was excellent. I want to reiterate that we are especially proud of our people. I believe the very best in the CPG industry. And by continuing to stay close to our consumers, we are confident that we have a bright future ahead. We remain focused on our consumer-centric growth strategy that will not change. We will continue to improve our execution, and we will continue to invest in increasing our investment in our brands, in our talent, and our capabilities. As I look ahead towards 2022, we expect continued pockets of volatility related to COVID or the inflation or the supply chain challenges. We continue to risk adjust our plans to ensure that we can successfully navigate these periodic disruptions and deliver on our targets. So we entered 2022 with a good momentum in our categories and the vast majority of our geographies. Our global and local brands, as I explained, are on solid footing with strong levels of investment. We continue to augment the portfolio with growth and creative snacking assets, and we are excited about the opportunities to advance multi-category strength in our key markets. We are going to continue to expand distribution in emerging markets, and we're going to further accelerate closing adjacencies and high-growth segments. So I thank you for your time and for your investment, and see you at the end of Q1. Thank you, everyone.

And this does conclude today's program. Thank you for your participation, and you may now disconnect.